Fertilizer Subsidies in Malawi

At a recent AERC research workshop in Nairobi, I made a comment about African governments’ not spending enough money on public goods, and spending too much on private goods such as fertilizers. The comment seemed to have struck a nerve. Several people in the audience pointed out that, in Malawi, fertilizer subsidies have increased cereal production, so government spending on fertilizers was not such a bad thing. Going beyond the general arguments that these fertilizer subsidies often don’t reach farmers (they’re stolen by middlemen) and that they benefit large (and hence less poor) farmers more, I suggested that even the Malawi case is not clear-cut.

As Maggie McMillanpoints out, it was improved seeds and the relaxation of farmers’ credit constraints that contributed most to the improved yield in Malawi: “Low fertilizer use is indeed one of the Africa’s most vexing challenges. But subsidizing is only a band-aid, masking its high cost and low productivity without sustaining growth. Such band-aids can be useful, but they can also be a distraction, drawing attention away from the interventions needed for large-scale improvements."

Comments

I think fertiliser is an intermediate public good, though not a pure public good, which means some attempt at private allocation would work. However, there are substantial externalities involved, in terms of lower food prices from the resulting increased farm production. Furthermore, fertiliser is not just a band aid; it is complementary to improved seeds. The fact that middlemen appropriate some of the "financial benefits" from subsidised fertiliser does not mean the fertiliser input is no longer a public good. That is an aspect of the influence of the bargaining skills of the production agents involved- from the government distribution store to the farm. The same could be said of special farm credits- who gets the credit may depend on political, religious,etc. affiliation, not to mention the issue of fungibility. At the end of the day, the issue to address is what combination- of improved seeds, credit, fertiliser (and other inputs)- to use. The answer will depend on the particular conditions in the country including the size of the agric budget, the target crops,level of poverty, etc.

Thanks for your comment, Kwabia. By a "public good," I mean something that is non-rival and non-excludable. Under this definition, fertilizer is not even an intermediate public good. That fertilizer use may lower food prices doesn't mean there are externalities: externalities are those effects that are not captured by the price mechanism. The problems with middlemen, bargaining power of production agents, and allocation of credit along political, religious and other grounds that you mention are all problems of government failure. These are some of the downsides that occur when we try to correct a (putative) market failure with government intervention.

Fertilizer is needed in Malawi for the farmers there to grow crops and improve their harvests and that is understood as a fact.
Low fertilizer usage is indeed a vexing challenge for that country and spending on it is not a crime as it constitutes a public good in that country, just like my friend Jude pointed out.

More on Maggie McMillan's point:
Returns to fertilizer use in Malawi, as everywhere else, depends critically on the simultaneous availability of other agricultural inputs, principally water. Malawi agriculture is almost all rainfed, and during the last two years, the country has been fairly fortunate as far as timely rainfall is concerned. So the higher production in these years speaks AS MUCH of timely rainfall (aka good luck) as of greater fertilizer use. But good luck cannot be guaranteed, and you'd see returns to fertilizer simply disappear when rainfall is inadequate. So I think fertilizer subsidy is really not the panacea that many nowadays make it out to be. In the absence of more permanent investments in irrigation and land improvement, one may well find subsidized fertilizer not doing the job just when you want it to do the most (during a drought year, for example).
Sure, in a normal year subsidized fertilizer wrests out some marginal increases in yield. But unfunny thing is that by doing precisely this, it has the effect of locking poor households in this particular livelihood cycle -- low productivity, subsidy-dependent maize production. If the temporary (and marginal) gains in food security brought about fertilizer subsidies actually lulls the government away from making longer term investments in land and irrigation, the locking becomes permanent, especially when subsidies have to be eventually scaled back (as most subsidies eventually do) and farmers are force to go back to "Square One".
So fertilizer subsidy is at best a temporary, stopgap measure -what it really does is provides an window of opportunity to make longer term investments without unnecessarily hurting the poor now. But if that window of opportunity is lost, as I fear it may well be, not much is achieved eventually.

Whilst a discussion on the price of fertilizer is very valid the point of the production and use of organic compost is not discussed. Yet this is not an unknown technology and more important for farmers with little access to cerdit it is free and proven to increase soil fertility and crop yeilds. A study in the Journal of Biological agriculture & horticulture vol. 19, no3 clearly demonstrates the benefits of compost, in combination with fertilizers (to make a little go a long way) or on its own, with regards to millet production:
"Increasing rural populations and the associated agricultural intensification and reduction in fallow periods of cropping systems in Senegal may be degrading soils. This may be related to the per capita decrease in food production of the semi-arid Sub-Sahel region. This study investigated the effect of applying combinations of manure/crop residue compost (2 t ha-1) and mineral fertilizer on yields of millet in the semi-arid agroecological zone of Senegal...Partial budget analysis indicated that net profits from compost + mineral fertilizer (US$68) was higher than mineral fertilizer (US$53), indicative of a synergistic effect. However, a net return from the use of compost alone was US$43. Thus, in the absence of mineral fertilizers or rock phosphate, farmers could achieve reasonable yields and income with continuous use of compost alone".
Maybe the focus of debate, as a matter of priority in increasing soil fertility, is how composting can be increased.

Well Dr. Shanta I agree with most of your ideas. It is clear that we need to make price shows the cost to the society of using a given product, the same to fertilizers. Most importantly interventions to development should be justified only if they benefit the poor(the majority), if they are going to serve few large farmers using advanced production systems why did the governemnt subsiize it. I don't see the necessity of subsidizding, but I think governments get into subsidy trap, because after they start the subsidy it's harder for them to remove it in fear of political opposition
The most important thing is governments need to invest on parts that have higher returns, why don't governments give much weight in making poor farmers to have market access, infiormation, good infrastructure and access to credit. I think subsidizing fertilizers may help a given farmer to use fertilizer, but at the same time much of the subsidy is going to middlemen, but why don't the government give credit access to the farmers so that he can buy the fertilizer and hence reflect fertilizer prices in output prices. It may be though that such moves will increase food prices and make the poor not to buy food. but why don't the government give the subsidy that has been given to fertilizer to purchase of food to the poor. Shanta I need your say on these.

I live in a village and work in agriculturing. We use fertilizers and i try to read everything about them.
This information is very useful for me. I also found another useful guide about fertilizers;
http://agricultureguide.org/agriculture/fertilizers/

There is a lot of misinformation on the effect of fertilizer use on the environment. While there are some problems to be solved, it should be pointed out that balanced fertilization has had a tremendous positive effect on our environment. I found some articles about the benefits of fertilizer at pptse.net.

Having been close to the small scale farmers that benefit from the fertilizer subsidies in Zambia, I feel that Fertilizer subsidy is an intermediate solution to food security for poor farmers. following a series of poor droughts and poor harvests I feel that the poor farmers need this assistance to lift them up from the effects of previous droughts and poor harvests. Although it is true that the support schemes are usually abused, it is also true that they have had a significant impact in improving yields and enhancing food security. I think it is better for governments to spend money on fertilizer subsidies than spending it on food aid to the farmers. A good harvest in Zambia has a great impact on GDP growth, it has been seen over the years that GDP growth is higher when there is a bumper harvest than not. I strongly disagree with the notion that fertilzer subsidies have little impact on improvements in yields, and the that improved seeds and other factors contribute to that. Yes, the subsidy program in Zambia comes with supply of the good seed leading to good harvest, just good seed and no fertilizer will not lead to a good yield.
Saying that governments should channel the subsidy money to longer term investments, well, that has not happened even when there were no subsidies. We shouldn't blame the subsidies for lack of longer term investments. I think the right way is for the governments to, over and above the subsidies, also make longer time investments while preparing the small scale farmers to be self sufficient.
By the way, why is it wrong for the poor countries to ensure food security by providing subsidies while it is correct for the rich countries to do the same. I find that to be very hypocritical.

I strongly agree with the Zambian example contribution. Fertilizer subsidy has had significant positive contribution to yield in Malawi too and most poor households have have very good 5 years with enough food. Yes other public investments are important but this has had significant impact in short term to large number of poor people.
Most of the contributions above seems to make simple assumptions that cost of input (fertilizer) should be paid back by the revenue from output (maize) hence providing credit could have a similar impact. I have met several people making the same connections but one thing that is most times forgotten is that the increased output is not easily liquidized to purchase fertilizer in subsequent years. This is a fundamental problem in subsidizing a food crop with low prices in developing countries where markets are imperfect or unavailable.
Yes, increase in output reduces the food prices, but this is a benefit to very few people, less that 10% of the population. Almost all rural households grow their own maize and a large number of potential urban buyers are growing their own maize in rented land around the cities. This drastically reduces the demand for maize hence very low prices, that does not help the farmers to get enough revenue to finance fertilizer in the subsequent year.
Therefore. government intervention in such market imperfection can be justified in short run while creating an enabling environment for market development either internally of export. Malawi is now facing some serious economic problems due to huge expenditures on fertilizer subsidy that are not paying back because of lack of markets or liquidation of the surplus output. However, the alternatives to supporting large poor food insecure populations are not viable in short run. No wonder they are still sticking to the program ...the better devil!!

A research in the Publication of Natural farming & farming vol. 19, no3 clearly shows the advantages of composting, along with plant foods (to create a little go a lengthy way) or on its own, with regards to millet production:
"Increasing non-urban communities and the associated farming intensification and decrease in fallow times of popping techniques in Senegal may be degrading earth.